the CAMP ENRON Report


CAMP ENRON:
... gateway to the next Progressive Era?

Some say it's nothing but a train wreck ... roll in the big cranes, clear the track, see what the crew's been smoking. If I thought so, I'd not be writing this ... and if they thought so, they'd not be drumming so hard.


For a brief orientation, see this
Welcome to Camp Enron

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Camp Enron Archives
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NOTE to READERS:
(2) All "major" articles of older material have now been imported, some with updates worth perusing. We'll keep it all on the main page for a while, will add a few loose pieces of history, will trim the main page and index the archives for convenience later.


OUR DEPARTMENTS:

the COGENT PROVOCATEUR:
free agent, loose cannon, pointy stick ... taking an imposing analytic toolkit out of the box, over the wall and into the street ... with callous disregard for accepted wisdom and standard English

reading the tea leaves from original angles, we've led with uncannily prescient takes on the federal surplus, the dotcom crash, the "Energy Crisis", the Afghan campaign, the federal deficit.

More where those came from ... stay tuned.


For brief orientation, see this
Welcome to CP


CAMP ENRON:
... gateway to the next Progressive Era?

For a brief orientation, see this
Welcome to Camp Enron

OTHER GOOD STUFF:
Many thanks to Tony Adragna and Will Vehrs, still shouting 'cross the Potomac at QuasiPundit. Early Camp Enron material can be found in QP's Dispatches department.
Tuesday, March 19, 2002

 
--- Andersen Agonistes ---

Say it ain't so, Joe!

"These are terrific times. Exciting times for our clients and our people." So sayeth Andersen CEO Joe Berardino in this June 2001 highlight package.
Berardino was elected CEO of Andersen in January 2001 for a term expiring in August 2004. Joe has been a member of the Andersen Worldwide board of partners since 1998.

... he was an architect of the firm’s Global 1000 client base expansion. ... a director of the Foreign Policy Association, trustee of the United States Council for International Business ... Fairfield University ... Advisory Council for the Mayor of Shanghai, the Conference Board, ... British American Business Council ... Economic Club of Chicago ... Field Museum ... Ohio State University Accounting Hall of Fame ... National Center for Education Accountability ... American Institute of CPAs and the New York Society of CPAs.
Meanwhile, WSJ on MSNBC dissects a widely-read Andersen white paper on accounting for telecom swaps:
[Andersen spokesman] "Andersen auditors provide accounting advice. They don't structure or promote transactions."

... The white paper includes a disclaimer, saying it doesn't constitute legal or expert advice.

... if the two companies each structure the transactions so that the capacity sold is an operating lease, and the capacity bought is a capital lease, Andersen interprets the companies as having not acquired "equivalent interests." ... It is then possible to start booking revenues over the life of the contract ...
OK, this is kinda like the Yates case. The defendant is clearly delusional. We can't honestly believe punishment will deter any similarly situated actor in the indefinite future. We can't just let it go, either. There are no asylums for accounting methodologies gone stark raving mad. And focus on Andersen keeps us comfortably distracted from all manner of woulda-coulda-shoulda's.

"I'm not an accountant" swears former Enron CEO Jeff Skilling. A lineup of Vinson & Elkins partners pleads "We're attorneys, not accountants". "We only work from the numbers in the financial statements", claimed security analysts who rated Enron a "Strong Buy" all the way to Chapter 11. It's not the Enron scandal, "it's the Andersen scandal", say right-of-center pundits concerned that Enron tar might stick to some of the wrong people.

OK, right, but if you raised five kids and changed zero diapers ... in the immortal words of criminologist Henry Lee: "Something wrong!".

Enron is a train wreck. On Enron's tail, Andersen is a train wreck. Global Crossing is a train wreck. As GX tumbles down the slopes of Mt. Telecom, it may derail Qwest on a parallel track. Switches are being thrown frantically to keep other providers and provisioners from sliding into this mess. Behind those, certain engines of global finance are rolling with a full head of steam and nowhere to go. The boxcars are rocking, the whistle's blowing, the wheels of commerce are throwing sparks.

When one train wreck follows another, it's time to ask hard questions about the track, the signals and the dispatch logs. Is this any way to run a railroad? No ... so by all means, lets punish somebody. Hey you, Andersen, get over here ... and bring your playbook!

Andersen objects, specifically to DOJ criminal indictments of the firm for obstruction of justice based on document shredding. Andy may have a good case.
Documents were shredded, but were they material to the investigation? What investigation? Was there reasonable expectation they would become subject of investigation? Were they irreplaceable? Were they enjoined? Who gave the order? Was there an order? Or was it a miscommunication? Or routine procedure? Was there a conspiracy? If so, by whom? A couple of rogue partners, or the whole firm?
DOJ Criminal Division chief Michael Chertoff cut his teeth on hard-core mob cases. He's imprinted with the formative experience of grilling suspects who are guilty and know it ... getting them to crack ... you just have to produce enough living witnesses, unintimidated jurors and unbought judges to make it stick. As Senate Whitewater committee counsel, Chertoff repeatedly embarrassed himself with toothless ambush attacks ... leaping out from behind some metaphorical filing cabinet with documents in hand, shouting "AHA!" at his intended victim, and shooting blanks.

Chertoff clearly means to send a message and set an example: "Don't mess with DOJ, you country club weenies!" But Andy doesn't think Andy is guilty -- at least not criminally guilty -- at least not as a firm -- at least not in the shredding caper -- and (like O.J.) asserts the right to a speedy trial. If Chertoff has no more ammo than what's visible in the public record, he's chosen a hard road to hoe ... and an early loss could dampen the fear factor he needs to turn witnesses in real meat-and-potatoes prosecutions to come.

If Chertoff does have an ace in the hole -- which is entirely possible -- it's a whole 'nother ballgame ... but the timing is curious. Andersen is toast anyway, with or without the felony rap. But a message must be sent, especially given their cavalier attitude, especially with the ink barely dry on Andy's Waste Management plea-bargain.

Andersen made several game efforts, but -- in a series of premature strategic appearances -- Berardino appeared under-prepared, under-planned, under-penitent ... and over-eager to shed the baggage and get back to the business of selling more business.

SEC isn't on the same page with DOJ. They're concerned with industry stability, and worried about the flood of incomplete, untimely and unaudited financial statements that will hit the floor if Andersen folds everywhere at once like the Taliban.

At CNN MoneyLine, Lou Dobbs objects ("high dudgeon" is Dobbs' best color) to "punishing the innocent" -- 85,000 employees and 5,000(?) US partners, most of whom didn't screw the Enron pooch. I'm less sympathetic on two grounds.

First, most of these innocents will suffer nothing more than a par-for-the-course job dislocation, followed by increased demand for their services, and many will end up with the same clients.

Second, Andersen is a partnership. That means sharing the good (the goods and the gains, ill-gotten or otherwise) -- and sharing the bad (fines, probation, responsibility). With no collective consequences in this system of collective responsibility, there'd be every incentive to look the other way ... and no incentive to maintain a high-integrity culture enforced through peer standard-setting and systemic internal vigilance. The punishment, for many, is out of proportion to the crime ... but that's life on the streets.

Will punishing Andersen make a difference the next time temptation rears its ugly head at one of the surviving Big Four? Next time, yes ... time after that, maybe ... as time goes by, no. Similar pressures will lead similar actors to push the envelope. The bigger they are, the harder they fall, and they are getting bigger, not smarter.

So Andersen gets the corporate death penalty, leaving four surviving "auditors of global reach". Suppose we bar consulting and auditing with the same firm. And suppose we mandate periodic rotation of audit firms. That leaves the typical large corporate client with consulting engagements in progress, and an audit transition on the calendar, with only one alternative for either. When the Big Four become the Big Three, there are no alternatives.

Andersen affiliates operate in nearly a hundred national jurisdictions, in conformance with local governing law and conventional forms of business. Some were grown organically, most were local firms acquired and assimilated. The "mother ship" is the Swiss-chartered Andersen Worldwide Societe Cooperative -- "a coordinating entity that holds together a loosely banded network of member firms" (WSJ), sharing methodology, leads, leverage, a little money, and the holy grail of 21st century commerce: branding.

By most accounts, international affiliates bear little jeopardy in US litigation. Maybe they can re-flag themselves on the fly, like so many Afghan warlords, and hoist the KPMG banner.

[As an emerging theme in the era of mobile global capital, intangible assets, arbitrary accounting and multinational enterprise: Who can audit a global corp any better than they want to be audited? Who can tax them, unless they choose to be taxed? Who can regulate them? Who can litigate them? Who's to enforce sanctity of contract? Who can collect what they owe, except as they choose to pay?]

In a Slate Frame Game column, Will Saletan raises another troubling tangent. Most of Andersen's assets -- human capital and client relationships -- reside outside the enterprise envelope. No court can attach them, if Andersen partners simply disperse and regroup elsewhere. Likewise any ill-gotten gain -- mostly on partners' personal balance sheets, very difficult to attach, with little cash in their respective partnership capital accounts. It's an "asset light" enterprise model, leading to relative impunity. Very, very hard to punish the guilty in this case -- or the innocent, for that matter.

Don't just stand there ... round up the usual suspects!